Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, it achieved net profit of 6.705 billion yuan, an increase of 64.31% year on year; 2024Q1 achieved net profit to mother of 2.035 billion yuan, an increase of 26.14% year on year, exceeding our previous expectations of 1.85 billion yuan. In 2023, the dividend was 0.4948 yuan per share, and the dividend ratio (with net profit to mother as the denominator) was 55%, in line with expectations.

Incoming water from Yalong River Hydropower continued to dry in 2023 and the first quarter of 2024, achieving contrarian growth with price supplements. Yalong River Hydropower's power generation decreased by 4.84% year on year in 2023, but benefiting from factors such as tightening electricity supply and demand in Sichuan Province, rising electricity prices for outbound Jiangsu, and electricity prices exceeding expectations in Lianghekou, the average annual feed-in electricity price increased 11.1% year on year, exceeding market expectations. Under the combined influence, Yalong River Hydropower achieved net profit of 8.66 billion yuan in 2023, an increase of 17.7% over the previous year. In the first quarter of 2024, incoming water continued to dry up. Hydropower generation in the Yalong River decreased by 8.21% year on year, but electricity prices rose again by 4.46% on a high base, driving performance against the trend. Considering that the company's quarterly report did not separate thermal power and hydropower performance, the hydropower section can refer to Sichuan Investment's energy performance (the vast majority comes from Yalong River hydropower investment income). The investment income calculated by the Sichuan Investment Energy Equity Law increased 7.04% year-on-year.

We analyzed that as electricity supply and demand in Sichuan continues to tighten, the volume and price of hydropower in the Yalong River is expected to rise further. Electricity supply and demand in the southwest region have continued to tighten in recent years, which is essentially a limitation on resource endowments. The power supply structure in the southwest region is highly dependent on hydropower. The power surplus in the early 13th Five-Year Plan period was mainly due to the centralized commissioning of a series of world-class hydropower plants, such as Waterfall Valley and Jinguan power packs. Combined with the promotion of market-based electricity reforms in 2015, electricity prices dropped sharply. The phenomenon of water disposal has attracted a large number of energy-intensive industries to move in, but with the end of the last round of hydropower production in 2020-2022, the scale of new hydropower will be extremely limited in the future, and tightening supply and demand will drive up electricity prices.

The thermal power business completely reversed losses. It is estimated that the performance for the first quarter of 2024 exceeded expectations and also came from the thermal power business. Benefiting from falling coal prices, the company's thermal power sector fully reversed losses in 2023. SDIC Jinneng, Meizhou Bay, Qinzhou and Huaxia Electric Power achieved net profits of 0.1, 2.5, 9.5, and 140 million yuan respectively (-12.8, -2.2, -1.7 and -0.7 billion yuan for the same period in 2022). The difference between the company's net profit and Sichuan Investment Energy in the first quarter of 2024 was about 0.76 billion yuan, far higher than the 0.48 billion yuan in the same period of 2022. Sichuan Investment Energy's 2024Q1 net profit increased by only 12.06% year on year. From this, it is estimated that the company's performance exceeding expectations in the first quarter of 2024 was mainly contributed by Thermal Power.

Continue to be optimistic about low covariance assets represented by hydropower. As the macroeconomic environment at home and abroad changes, we analyze that market repricing of risk will become the core driving force for sector rotation for some time to come. From the perspective of the DCF model, the weight or marginal rise on the denominator side has led to a restructuring of the valuation system. Combined with the CAPM model, the discount rate for low covariance assets (associated with weak macroeconomics) is expected to continue to decline as the market reprices the denominator side. Low covariance asset revaluation is an inevitable result of market equilibrium and has nothing to do with the market's macroeconomic expectations. Furthermore, when the discount rate falls, assets with a longer period of time benefit. Therefore, we believe that low-covariance and long-term assets will continue to dominate for some time to come, and hydropower is exactly the intersection of the two paths, and the company is expected to fully benefit as a leading company.

Profit forecast and rating: Based on the company's first-quarter data, we maintain the company's 2024-2025 net profit forecast of 7.542 and 8.503 billion yuan, respectively, and add the 2026 forecast to 9.088 billion yuan. The current stock price corresponds to PE of 15, 13, and 13 times, respectively. We believe that the hydropower sector has long-term allocation value and maintains a “buy” rating.

Risk warning: Incoming water fluctuates, electricity prices fall short of expectations.